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Compliance a cost or a benefit?

The importance of a good governance system, a holistic approach to compliance, can not be overemphasised: in an increasingly responsive stakeholder environment managing regulatory risk and being committed to the principles of good governance is vital to overall strategic management.

– Compliance- A Business Enabler, Australian Compliance Institute 7th National Compliance Conference

Compliance that is approached holistically will add value to any organisation if it is applied consistently. The key challenge when dealing with compliance is embedding a compliance culture throughout the whole of the organisation. There are three simple but very important factors crucial in creating benefit through compliance and these are;

  • Developing a clear and consistent communication process at all levels within the organisation that outlines its expected standards and of which compliance is integrated. This will ensure standards are visible, ongoing and embedded;
  • Integrating compliance related key performance indicators in job designs. This may also extend to reward structures;
  • Developing a team-based approach where compliance is seen as a collaborative effort.

Organisations who embrace compliance within their business culture realise the benefits by enhancing the quality of business operations. This is achieved by providing clear guidelines and encouraging reporting of lax business practices or breaches. This increases the awareness of risks faced by the organisation and once addressed can provide them with a competitive edge in the market place.

The biggest risk and cost facing an organisation introducing a compliance program is running it in isolation of other management activities. Resources directed toward a stand alone approach are immediately and invariably viewed as a huge cost because in truth it’s considered as an impediment rather than an opportunity to implement good business practice.

Professor Allan Fels, Dean Australian and New Zealand School of Government stated recently that a common perception of compliance amongst the business community is that is done to keep regulators happy. He believed this view was short sighted and considered compliance creating two main benefits:

  1. It will help to avoid breaking the law and suffering the consequences, thereby saving the company time, money and heartache; and
  2. A good compliance program can actually enhance a company’s “positive” business purposes (other than reactive risk-management).
– (Compliance programs – the benefits for companies and their stakeholder. Prof Alan Fels)

Looking after the operational risks of any business is not a new concept for insurance brokers. Up until FSR it has been a matter of brokers telling customers to do as I say rather than doing as I do. Prior to FSR brokers institutively applied a number of good business practice principles but not necessarily formalised the process. In this respect compliance has forced them to identify and address risks to their business; articulate their strategies and document how they will proceed. Compliance has benefited broking organisations by teaching them how to more thoroughly evaluate and justify decisions affecting the health and well being of their business.

What are the potential risks to the organisation if no compliance programme was in place? Obviously they would not have a license under which to operate. They may also never realise the potential of their business. The effect of compliance has forced principals to become better managers because the success of a business does not solely rely upon having a good relationship with customers. Principals have had to consider more carefully the risks of their business operation. In today’s environment an organisation has an increased risk of:

  • Damage to its business reputation both from within the market place and from its customers. The insurance sector market is still feeling the effects of the HIH legacy.
  • The consequences of any breach which may range from fines to court action and potential withdrawal their AFS license.

A demonstration of how the above can potentially affect the organisation was a recent enforcement action taken by ASIC against AIG. In brief AIG were found to have not fully monitored or corrected the inappropriate actions of their Authorised Representatives. The benefit of a rigorous and integrated compliance approach in this case would have saved AIG from substantial remedial costs and unwelcome media attention.

Those who continue to see compliance as a necessary evil and in isolation of the business will struggle in the future. Those out there who are not convinced should ask themselves this question. Would you take on a new client who has no regard for your risk management advice and in doing so compromises their legal and/or regulatory requirements?

Compliance has added cost to financial services organisations and there is no denying this fact. The question really is - do these costs outweigh the potential benefits? The answer to date is a mixture of both. In the short term it was a definite and painful yes however in the medium to long term it will be no. It is also fair to say that some costs and benefits will be almost incalculable but nonetheless real – perhaps this how you define a paradigm shift to a positive business culture!

Date 01.06.06